Netgear 2013 Annual Report Download - page 24

Table of Contents
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rate has fluctuated in the past and may
fluctuate in the future. Future effective tax rates could be affected by changes in the composition of earnings in countries with differing tax rates,
changes in deferred tax assets and liabilities, or changes in tax laws. Numerous foreign jurisdictions have been influenced by studies performed by the
OECD (Organization of Economic Cooperation and Development) and are increasingly active in evaluating changes to their tax laws. The OECD, which
represents a coalition of member countries, has issued various white papers addressing tax base erosion and jurisdictional profit shifting (BEPS). Their
recommendations are aimed at combatting what they believe is tax avoidance. Changes in tax laws could affect the distribution of our earnings and
adversely affect our results.
We are also subject to examination by the Internal Revenue Service, or IRS, and other tax authorities, including state revenue agencies and foreign
governments. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax
authorities to determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these
examinations will not materially adversely affect our financial condition and operating results. Additionally, the IRS and several foreign tax authorities
have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangible assets. Tax
authorities could disagree with our intercompany charges, cross-
jurisdictional transfer pricing or other matters and assess additional taxes. If we do not
prevail in any such disagreements, our profitability may be affected.
We must comply with indirect tax laws in multiple foreign jurisdictions. Audits of our compliance with these rules may result in
additional
liabilities for tax, interest and penalties related to our international operations which would reduce our profitability.
Our international operations are routinely subject to audit by tax authorities in various countries. Many countries have indirect tax systems where
the sale and purchase of goods and services are subject to tax based on the transaction value. These taxes are commonly referred to as value-
added tax
(VAT) or goods and services tax (GST). Failure to comply with these systems can result in the assessment of additional tax, interest and penalties. While
we believe we are in compliance with local laws, there is no assurance that foreign tax authorities agree with our reporting positions and upon audit may
assess us additional tax, interest and penalties. If this occurs and we cannot successfully defend our position, our profitability will be reduced.
If our goodwill or intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our intangible assets for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered when
determining if the carrying value of our goodwill or intangible assets may not be recoverable include a significant decline in our expected future cash
flows or a sustained, significant decline in our stock price and market capitalization.
As a result of our acquisitions, we have significant goodwill and intangible assets recorded on our balance sheet. In addition, significant negative
industry or economic trends, such as those that have occurred as a result of the recent economic downturn, including reduced estimates of future cash
flows or disruptions to our business could indicate that goodwill or intangible assets might be impaired. If, in any period our stock price decreases to the
point where our market capitalization is less than our book value, this too could indicate a potential impairment and we may be required to record an
impairment charge in that period. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based
on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash
flows may vary significantly from actual results. As a result, we may incur substantial impairment charges to earnings in our financial statements should
an impairment of our goodwill or intangible assets be determined resulting in an adverse impact on our results of operations.
In the fourth fiscal quarter of 2013, we completed our annual impairment test of goodwill and determined no impairment existed as of September
30, 2013. We will continue to test goodwill for impairment at least annually at the business unit level, and more frequently if we become aware of
changed conditions or situations since the prior impairment testing that might call into question whether the current balances are fairly recorded. The
allocation of goodwill may have greater impact for certain of
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changes in accounting and tax standards or practices;
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changes in the composition of operating income by tax jurisdiction; and
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our operating results before taxes.